Inflation. How worried should we be?
This “Keep Calm” post showed up in my inbox today. I posted a partial of Economist Claudi Sahm’s report. She is discussing January CPI. I am more interested in the layoffs at the government and now corporations. I am seeing companies starting to follow suit with layoffs.
Today and after the crash at Washington D.C., Trump and Musk are laying off FAA personnel. Fifteen people injured on a Delta flight. A live feed from the airport show the flight upside down on the tarmac as people walk away and crews douse the plane. Television news reports say the Delta flight flipped over on landing. I am assuming not FAA related.
Keep calm. Inflation. How worried should we be?
– by Claudia Sahm
Stay-At-Home Macro (SAHM)
It’s one month of data. As Fed Chair Powell said last week, the Fed doesn’t overreact to a few months of good data or to a few months of bad data. We should not either. The January CPI was not good and slowed progress toward the Fed’s target. Even so, it is unlikely the start of a reacceleration in inflation.
Last year, we saw that the firm prints in the first quarter turned into soft prints in the summer. As a result, the year saw further progress: core CPI was 3.2% in December 2024 versus 3.9% in December 2023 despite its hot start. And it’s not just last year; January CPI has been a source of repeated upside surprises. This year, it is too soon to write off disinflation or Fed rate cuts in 2025.
This year’s surprise in CPI might not be as worrisome as last year’s. As one example, core services excluding housing—known as “supercore”—surged similarly this January and last, but it was less broad-based this year. Transportation services (in orange, led by motor vehicle insurance and airfares) and recreation services (in purple, led by subscription services and events), about one-third of the supercore category, accounted for almost 80% of the increase this January. Last year, the surge was spread more evenly across the supercore categories.
Source: Bureau of Labor Statistics via Bloomberg.
Economist Claudia Sahm: CPI was not good . . .
Last week, we learned that the Consumer Price Index rose by 0.47% in January, well above expectations. Excluding food and energy, the news was not much better, with a 0.45% advance. It was a disappointment and a familiar one. January has often been hotter than expected over the past several years. Given these new data, how worried should we be about inflation for this year?
The Delta accident was at the Toronto Airport, so not FAA.
My best, intuitive indicator of future inflation is to look at corporate profit margins. After all, it’s corporations, not consumer expectations, which have the final say on where prices are going. And corporate profit margins since 2020 have been rising steadily, following the surge in 2020. During the low inflation 2020s, margins held fairly steady, fluctuating around 11%. Now they have been rising, fluctuating around 18% in 2024.
https://fred.stlouisfed.org/series/A466RD3Q052SBEA
I see no reason to expect that Corporate America’s lust for ever higher profit margins will diminish in 2025, particularly with Trump as President.
Nobelists Stiglitz and Krugman say we should be worried.
Nobel Economist Warns How Donald Trump’s Policies Could Spectacularly Crash
Trump would be a pretty rare Republican not to crash the economy. Given the almost complete detachment of the financial sector from the functional economy, I expect something like the Great Depression. That’s what we got the last time the Republicans held the House, Senate, Supreme Court and presidency. This one will be different, though, with the stock market soaring.